WEBVTT - TechStuff Tidbits: What is a Unicorn? 0:00:04.440 --> 0:00:12.400 Welcome to Tech Stuff, a production from iHeartRadio. Hey thereon 0:00:12.560 --> 0:00:16.160 Welcome to Tech Stuff. I'm your host, Jonathan Strickland. I'm 0:00:16.160 --> 0:00:20.440 an executive producer with iHeartRadio and how the tech are 0:00:20.520 --> 0:00:25.520 you so. A decade ago, an investor named Aileen Lee, 0:00:25.960 --> 0:00:30.520 the founder of a venture capital firm called Cowboy Ventures, which, 0:00:30.800 --> 0:00:35.120 like crap, that's a great name. She coined the term 0:00:35.440 --> 0:00:40.360 unicorn to describe a startup that has reached the unbelievable 0:00:40.400 --> 0:00:46.720 milestone of a billion dollar valuation, and since then, tech 0:00:46.800 --> 0:00:50.400 boffins have used the term unicorn to single out startups 0:00:50.400 --> 0:00:55.200 that stand out from among the crowd. Every startup founder 0:00:55.400 --> 0:00:59.880 is hoping for a unicorn. In fact, every investor is 0:01:00.040 --> 0:01:02.440 hoping that they get in on the ground floor of 0:01:02.480 --> 0:01:07.160 supporting a unicorn. The end goal for most investors is 0:01:07.200 --> 0:01:10.600 to sink a decent investment in a startup, see that 0:01:10.680 --> 0:01:15.360 startup climb and valuation to astronomical heights, and then rake 0:01:15.400 --> 0:01:19.759 in the wealth when that company inevitably goes public. That's 0:01:19.800 --> 0:01:23.000 the dream scenario. You see this huge return on your investment. 0:01:23.640 --> 0:01:26.800 In fact, there are venture capital firms that really count 0:01:27.040 --> 0:01:31.680 on a few of the companies they pick reaching a 0:01:31.800 --> 0:01:36.600 level of unicorn status because it pretty much carries the 0:01:36.760 --> 0:01:40.920 entire company. It'll help carry and balance out all the 0:01:40.920 --> 0:01:45.800 ones that didn't really reach those levels. What's interesting to 0:01:45.840 --> 0:01:49.440 me is that there's no point in this journey toward 0:01:49.520 --> 0:01:53.120 billion dollar valuation where a startup actually needs to make 0:01:53.160 --> 0:01:57.960 a profit. Startups can reach a billion dollar valuation without 0:01:58.080 --> 0:02:01.559 making a profit. They could potentially make it without even 0:02:01.640 --> 0:02:04.920 having a plan to reach profitability, although that's less likely. 0:02:06.120 --> 0:02:09.320 Typically they will be at a point where they're generating revenue, 0:02:09.600 --> 0:02:12.360 but they're not making more than what they're spending, so 0:02:12.680 --> 0:02:15.600 they're still operating at a loss. So as an example 0:02:15.639 --> 0:02:19.000 of this, I'll give you a unicorn example. The former 0:02:19.040 --> 0:02:24.680 Twitter now X originally reached a billion dollar valuation back 0:02:24.840 --> 0:02:28.920 in two thousand and nine, but Twitter didn't turn an 0:02:29.080 --> 0:02:35.240 annual profit until two thousand and eighteen. Nine years later, 0:02:35.280 --> 0:02:38.200 it was worth a billion dollars but had not yet 0:02:38.240 --> 0:02:42.160 made an annual profit. It did make a quarterly profit 0:02:42.200 --> 0:02:45.280 a couple of times before twenty eighteen, but the first 0:02:45.320 --> 0:02:46.799 time it made a profit at the end of a 0:02:46.880 --> 0:02:51.839 year was twenty eighteen. Crazy, So profits are not really 0:02:51.880 --> 0:02:55.560 a necessity when it comes to achieving unicorn status. It's 0:02:55.560 --> 0:02:58.680 certainly not a necessity for making a boatload of money 0:02:58.919 --> 0:03:02.919 off of a company. Now, that was not always the case, right. 0:03:03.160 --> 0:03:07.120 Once upon a time, investors were much fewer and further between. 0:03:07.800 --> 0:03:11.800 It was harder to get hold of investment capital. So 0:03:11.960 --> 0:03:14.600 for a business to really survive, it had to make 0:03:14.639 --> 0:03:16.880 a profit, or at the very least, it had to 0:03:16.919 --> 0:03:19.360 break even. Otherwise there was no way to cover the 0:03:19.400 --> 0:03:23.560 costs of operation, and you would you run yourself out 0:03:23.600 --> 0:03:26.120 of business. It'd be too expensive to run the business 0:03:26.200 --> 0:03:28.760 to stay in business, and any hope of becoming an 0:03:28.880 --> 0:03:33.760 enormous success really hinged upon being profitable. But let's put 0:03:33.760 --> 0:03:36.760 that aside for a little bit. Let's get back to 0:03:36.800 --> 0:03:41.800 talking about unicorns. So in twenty thirteen, Aileenlye writes a 0:03:41.800 --> 0:03:46.160 piece titled Welcome to the Unicorn Club. Learning from billion 0:03:46.280 --> 0:03:51.600 dollar Startups, and Lee called these billion dollars startups unicorns 0:03:52.080 --> 0:03:56.440 because of their rarity. They were so incredibly rare. According 0:03:56.440 --> 0:04:00.480 to her company's research, out of the thousands of companies 0:04:00.520 --> 0:04:03.240 that had been launched in the previous decade from two 0:04:03.280 --> 0:04:07.720 thousand and three to twenty thirteen, only point zero seven 0:04:07.840 --> 0:04:12.560 percent of them reached a billion dollar valuation. I want 0:04:12.600 --> 0:04:15.200 to say it was like thirty nine companies at the time. 0:04:15.720 --> 0:04:22.360 So that raises a question, what exactly is valuation? How 0:04:22.360 --> 0:04:27.200 do analysts determine or really, if we want to be accurate, 0:04:27.360 --> 0:04:31.360 how do they estimate the value of a startup, especially 0:04:31.360 --> 0:04:36.480 a startup that may not have a product to sell. Now, 0:04:36.520 --> 0:04:41.120 with publicly traded companies, one way to measure value is 0:04:41.240 --> 0:04:45.400 through market capitalization. This is a pretty simple concept, really, 0:04:45.760 --> 0:04:49.680 So publicly traded companies have shares. Right, you can purchase 0:04:50.040 --> 0:04:53.520 a share in the company. Each share is worth a 0:04:53.560 --> 0:04:57.440 certain amount, and that amount is determined by the market. Now, 0:04:57.480 --> 0:04:59.880 going into all the different forces that play into the 0:05:00.000 --> 0:05:03.039 the share value of a company would go well beyond 0:05:03.080 --> 0:05:06.640 my meager ability to explain. If I could explain all 0:05:06.640 --> 0:05:09.960 of that in great detail, I would be in a 0:05:10.000 --> 0:05:15.640 different tax bracket. But essentially, for market capitalization, you take 0:05:16.040 --> 0:05:19.640 the number of shares that are outstanding the ones that exist, 0:05:19.680 --> 0:05:22.440 in other words, and you multiply that number of shares 0:05:22.839 --> 0:05:26.680 by the value per share. Then you get the market 0:05:26.720 --> 0:05:30.520 capitalization of a company. So we'll use an overly simplified 0:05:30.600 --> 0:05:34.159 hypothetical example. Let's say we've got a company and we're 0:05:34.160 --> 0:05:38.520 calling it Willie's Widget Wonderland. It's a publicly traded company, 0:05:38.880 --> 0:05:42.080 and the shares for Willy's Widget Wonderland are trading at 0:05:42.120 --> 0:05:46.080 ten dollars per share. So for ten American dollars, you 0:05:46.120 --> 0:05:49.520 can buy yourself a single share in this company. Let's 0:05:49.560 --> 0:05:52.800 also say that there are only one hundred thousand shares 0:05:52.839 --> 0:05:56.120 of this company at all, that's all that exists. Well, 0:05:56.120 --> 0:05:58.799 we would then multiply these two numbers together, right, ten 0:05:59.040 --> 0:06:02.480 dollars per share, one hundred thousand shares. That gives us 0:06:02.520 --> 0:06:06.440 a million dollars. Boom, that's the market cap for Willie's 0:06:06.680 --> 0:06:12.600 Widget Wonderland. Now, like valuation, market cap doesn't rely on 0:06:12.720 --> 0:06:17.080 stuff like profit or revenue, at least not directly. Those 0:06:17.240 --> 0:06:21.200 factors can play into the value of the company by 0:06:21.320 --> 0:06:25.000 affecting the company's stock value, and that in turn does 0:06:25.120 --> 0:06:30.200 affect market capitalization. So market cap tells us what the market, 0:06:30.240 --> 0:06:33.520 the stock market in this case, values a company at. 0:06:33.920 --> 0:06:39.880 Often investors will reference marketcap as the size of the company. Now, technically, 0:06:40.440 --> 0:06:43.080 market cap doesn't indicate if a company is, you know, 0:06:43.200 --> 0:06:47.600 physically larger or smaller than any other company, but rather 0:06:48.120 --> 0:06:53.680 the size of its value in the marketplace. However, typically 0:06:54.200 --> 0:06:59.360 larger cap companies are more established, and usually that means 0:06:59.360 --> 0:07:02.520 they are also more stable than companies that have a 0:07:02.640 --> 0:07:06.240 smaller market cap. But you know, to talk about the 0:07:06.320 --> 0:07:09.400 value of a company beyond just the measure of market cap, 0:07:09.440 --> 0:07:11.240 you have to talk about all sorts of other stuff, 0:07:11.320 --> 0:07:13.840 like you might have to take into account how much 0:07:13.920 --> 0:07:18.280 revenue the business generates, what are its costs of operation, 0:07:18.680 --> 0:07:21.360 how much does it pay in taxes? You know, how 0:07:21.400 --> 0:07:24.520 much of the business has depreciated over time, and by 0:07:24.520 --> 0:07:27.880 how much. This kind of gets us into the dreaded 0:07:28.120 --> 0:07:32.960 EBITDA or EBITA as I've heard it said that actually 0:07:33.000 --> 0:07:38.000 it's eb I t DA. It stands for earnings before interest, taxes, 0:07:38.080 --> 0:07:42.840 depreciation and amortization, And y'all, I have been in meetings 0:07:43.160 --> 0:07:47.000 where EBEDA is part of the discussion, and every time 0:07:47.040 --> 0:07:51.120 it happens, I can feel my eyes start to glaze over. 0:07:52.000 --> 0:07:54.000 I will say that there are critics who have argued 0:07:54.000 --> 0:07:58.240 that EBEDA has been misused, that companies have leaned on 0:07:58.280 --> 0:08:02.840 EBEDA to perhaps overstate their profitability because it does take 0:08:02.960 --> 0:08:07.520 a lot of costs out of that equation, and that 0:08:07.600 --> 0:08:11.160 it's really just a way for companies to make it 0:08:11.200 --> 0:08:13.880 seem like they're doing a lot better than perhaps how 0:08:13.920 --> 0:08:16.240 they are really doing once you take all of these 0:08:16.280 --> 0:08:19.320 different factors into consideration. But to get into it further 0:08:19.320 --> 0:08:21.440 would mean we'd need to find another host because I 0:08:21.480 --> 0:08:24.200 would fall asleep. And anyway, we're not really talking about 0:08:24.200 --> 0:08:28.440 publicly traded companies, are we We're talking startups. So a 0:08:28.480 --> 0:08:33.840 startup typically is a privately held company, a corporation. It 0:08:33.960 --> 0:08:36.600 usually has the goal of becoming a publicly traded company 0:08:36.640 --> 0:08:40.760 at some point in the future. It's not necessarily its goal, 0:08:41.480 --> 0:08:46.320 but often that is the understanding among both the startup 0:08:46.360 --> 0:08:50.200 itself and its investors. So how the heck do you 0:08:50.280 --> 0:08:54.240 assign value to an entity like that. It's not a 0:08:54.240 --> 0:08:58.640 business that's established, that has a history, that has actual 0:08:59.400 --> 0:09:03.640 spreadsheet showing things like costs versus revenue. How do you 0:09:03.679 --> 0:09:07.839 put a value on a startup that, perhaps in its 0:09:07.880 --> 0:09:11.319 earliest stage, is very little more than just a good idea, 0:09:11.679 --> 0:09:14.920 or hopefully a good idea. And that's a really good question. 0:09:15.600 --> 0:09:18.040 So let's imagine that we have a brand new startup 0:09:18.280 --> 0:09:21.360 and the founders have, you know, an interesting idea, but 0:09:21.400 --> 0:09:23.640 at the start, they don't actually have a product to sell. 0:09:23.960 --> 0:09:28.040 There's no operating income for the business. Maybe they've got 0:09:28.040 --> 0:09:32.120 a company structure, like maybe they've designated officers for the 0:09:32.160 --> 0:09:36.680 business who are in charge of specific functions, but as 0:09:36.720 --> 0:09:39.360 of right now, they're not yet producing something that they 0:09:39.360 --> 0:09:42.920 can sell. How do you place a value on that 0:09:43.040 --> 0:09:46.720 kind of operation? But hold on, it gets even more 0:09:46.760 --> 0:09:50.560 complicated than that. Let's say that this startup is a 0:09:50.600 --> 0:09:55.400 really new idea, like it's really innovative, something that hasn't 0:09:55.480 --> 0:09:59.200 seen much or perhaps any representation in the market as 0:09:59.240 --> 0:10:01.920 of right now. Now, well, that makes it even harder 0:10:01.960 --> 0:10:05.000 because it means you have very little you can compare 0:10:05.080 --> 0:10:08.840 that startup against in the market, So that becomes a 0:10:08.840 --> 0:10:11.559 barrier to valuation. You can't say, oh, well, this other 0:10:11.679 --> 0:10:15.240 company is valued at such and such, so that's probably 0:10:15.320 --> 0:10:17.200 the ballpark where we need to look at for this 0:10:17.240 --> 0:10:19.600 other startup. If the two startups are nothing alike, then 0:10:19.640 --> 0:10:23.840 there's no reason to port over that value from company 0:10:23.840 --> 0:10:26.960 A to company B. On top of that, the market 0:10:27.080 --> 0:10:30.840 changes quickly, which makes it really hard to predict how 0:10:30.920 --> 0:10:33.400 the startup is going to perform in the future. So 0:10:33.600 --> 0:10:37.880 will the market continue to support this startups business model 0:10:38.200 --> 0:10:41.040 and thus lead to enormous growth, which is what all 0:10:41.360 --> 0:10:44.920 the parties involved want to see. Or will the market 0:10:44.960 --> 0:10:48.720 itself change and thus the business model then becomes irrelevant. 0:10:48.800 --> 0:10:50.720 It's not that the business model was bad, it's just 0:10:51.040 --> 0:10:54.000 it no longer applies because the market itself has changed. 0:10:54.440 --> 0:10:58.200 Or will it turn out that the market demand for 0:10:58.240 --> 0:11:01.480 the company's product just isn't there, like you think it's 0:11:01.520 --> 0:11:03.440 there because it sounds like a great idea, but once 0:11:03.480 --> 0:11:06.319 you actually get it out there, no one really seems 0:11:06.480 --> 0:11:09.959 jazzed about it. Here this reminds me kind of of 0:11:10.000 --> 0:11:13.439 how I see the metaverse right now. Obviously, the metaverse 0:11:13.480 --> 0:11:15.880 itself is not a startup, but the fact that I 0:11:15.920 --> 0:11:19.280 often see a lack of enthusiasm in the general public 0:11:19.400 --> 0:11:22.800 around the concept of the metaverse makes me question the 0:11:22.840 --> 0:11:27.400 wisdom of investing billions of dollars into that idea. So 0:11:27.520 --> 0:11:30.079 the truth of the matter is that lots of factors, 0:11:30.200 --> 0:11:34.480 some of them subjective ones, will come into play to 0:11:34.559 --> 0:11:38.280 determine a startup's value, and they can include things like 0:11:38.360 --> 0:11:42.320 investor opinions. If investors are enthusiastic about a startup, that 0:11:42.400 --> 0:11:46.440 startups valuation typically goes up. But other stuff involves things 0:11:46.480 --> 0:11:49.240 like market trends or assumptions about the market in general. 0:11:49.280 --> 0:11:52.440 So it gets very whibly wobbly. We're going to take 0:11:52.440 --> 0:11:53.920 a quick break. When we come back, I'm going to 0:11:53.920 --> 0:12:08.880 talk about some approaches toward assigning value to startups. Okay, 0:12:08.880 --> 0:12:11.439 we're back. So, as I mentioned, there are a couple 0:12:11.440 --> 0:12:15.600 of different ways that investors will attempt to assign value 0:12:15.640 --> 0:12:19.520 to a startup, which will ultimately determine whether a startup 0:12:19.559 --> 0:12:23.439 reaches Unicorn status. One of those ways is called the 0:12:23.480 --> 0:12:28.360 market multiple approach. So broadly speaking, this method takes a 0:12:28.360 --> 0:12:32.760 look at recent acquisitions in whatever sector the startup is in. 0:12:33.240 --> 0:12:36.200 So if the startup is at all similar to other 0:12:36.280 --> 0:12:39.680 businesses that are part of these acquisitions, this is a 0:12:39.720 --> 0:12:42.679 good approach, or at least a viable one. So what 0:12:42.760 --> 0:12:44.599 you do is you look at the acquisitions that have 0:12:44.640 --> 0:12:48.240 been made. You also take a look at how much 0:12:48.400 --> 0:12:51.400 those businesses, those startups that got acquired, how much were 0:12:51.480 --> 0:12:53.800 they making in sales or how much sales were they 0:12:53.840 --> 0:12:57.839 actually seeing at the time of acquisition, And then how 0:12:57.880 --> 0:13:00.800 much of a multiplayer is there for the amount of 0:13:00.800 --> 0:13:05.640 sales versus the amount that was paid for at acquisition. 0:13:06.000 --> 0:13:09.080 That gives you your market multiple. So let's talk about 0:13:09.240 --> 0:13:12.280 our fictional widget company again. Let's imagine the widget company 0:13:12.320 --> 0:13:16.040 is not publicly traded, it's a startup. And let's say 0:13:16.040 --> 0:13:18.880 that investors look at how much other companies are paying 0:13:18.920 --> 0:13:21.679 to acquire hardware companies that are in some way similar 0:13:21.720 --> 0:13:25.119 to this widget company, and it turns out the acquisition 0:13:25.240 --> 0:13:29.360 price is about six times greater than the actual sales 0:13:29.640 --> 0:13:32.160 that these companies are making. That that's the average that 0:13:32.160 --> 0:13:36.480 you're seeing across these acquisitions six times more. So your 0:13:36.520 --> 0:13:39.480 market multiple is six and you can use that multiple 0:13:39.559 --> 0:13:43.280 to kind of estimate your own company's valuation, though obviously 0:13:43.280 --> 0:13:45.440 you're going to have to tweak that depending upon the 0:13:45.440 --> 0:13:48.160 status of your own startup. So for example, if you 0:13:48.160 --> 0:13:51.640 haven't really built out manufacturing facilities yet and you don't 0:13:51.640 --> 0:13:57.280 actually have anything to sell, well, you can't really multiply anything. 0:13:57.320 --> 0:14:00.520 If you're at very low scale then and maybe your 0:14:00.600 --> 0:14:04.440 multiple is much lower because you haven't proven that you 0:14:04.480 --> 0:14:07.560 can scale the business up yet, and that means that 0:14:07.600 --> 0:14:10.959 investors are taking on a greater amount of risk when 0:14:11.000 --> 0:14:13.680 they invest in your company. So your multiple ends up 0:14:13.720 --> 0:14:18.240 being smaller than the market six times multiple that you're 0:14:18.240 --> 0:14:20.880 seeing elsewhere. But this can be a way to kind 0:14:20.920 --> 0:14:25.240 of guide you toward valuation. Obviously, the big hurdle here 0:14:25.720 --> 0:14:29.640 is that the market multiple approach is dependent upon finding 0:14:29.880 --> 0:14:34.120 comparable businesses in the market that have been acquired. If 0:14:34.160 --> 0:14:38.400 your startup is really innovative and really doesn't resemble other 0:14:38.480 --> 0:14:41.160 stuff that's already on the market, then you don't have 0:14:41.200 --> 0:14:43.440 anything to compare it against. You don't have any way 0:14:43.480 --> 0:14:46.080 to derive the multiple in the first place, because there's 0:14:46.080 --> 0:14:48.360 no one else out there that's like you. So you 0:14:48.400 --> 0:14:51.440 can't depend upon what's happening in other parts of the 0:14:51.480 --> 0:14:56.680 market because it may not have any application toward your situation. However, 0:14:56.720 --> 0:15:00.840 there are other means to assign valuation. So another is 0:15:00.880 --> 0:15:04.880 called the cost to duplicate. This is pretty self explanatory. 0:15:05.000 --> 0:15:07.840 How much money would it take to build a duplicate 0:15:07.960 --> 0:15:12.880 copy of the startup in question. Now, actually coming up 0:15:12.920 --> 0:15:15.080 with that figure can be a little tricky because it 0:15:15.120 --> 0:15:18.040 can involve stuff that's a little more ephemeral than just 0:15:18.480 --> 0:15:21.840 how much do the facilities cost? How much is the 0:15:21.840 --> 0:15:28.080 business paying its staff, like how much is not just 0:15:28.240 --> 0:15:31.560 rent but the cost of operations. It can actually include 0:15:31.600 --> 0:15:35.840 other stuff too, like intellectual property that becomes harder to 0:15:35.840 --> 0:15:39.840 put an actual, like monetary value to and that gets 0:15:39.880 --> 0:15:43.680 a bit wishy washy, or things like the value of 0:15:43.760 --> 0:15:46.400 research and development that's going on within the startup. How 0:15:46.400 --> 0:15:49.520 do you put a monetary value on that. So the 0:15:49.560 --> 0:15:52.800 cost to duplicate has a pretty big drawback. It gives 0:15:52.880 --> 0:15:57.640 a snapshot of a company's current value, but it doesn't 0:15:57.680 --> 0:16:01.160 necessarily take all of its assets into account because not 0:16:01.200 --> 0:16:04.640 all of them are so easily reduced to a figure, 0:16:04.960 --> 0:16:08.400 and it cannot bring into account the potential for the 0:16:08.440 --> 0:16:12.080 company's success. Right It's looking at a snapshot of why 0:16:12.120 --> 0:16:15.000 it's valued right now, but it's not telling you what 0:16:15.160 --> 0:16:18.640 will it be valued six months from now, assuming that 0:16:18.680 --> 0:16:22.880 everything's working well. So there are assets that just might 0:16:22.920 --> 0:16:26.480 not be quantifiable, but they are still valuable to the organization, 0:16:26.560 --> 0:16:28.040 but they're not going to show up on a spreadsheet 0:16:28.040 --> 0:16:31.240 because he can't reduce it down to that data point. 0:16:31.600 --> 0:16:34.960 For that reason, the cost to duplicate method can undervalue 0:16:35.160 --> 0:16:38.640 a startup, sometimes by a significant amount. So you could say, like, 0:16:38.640 --> 0:16:42.560 all right, well this is the low ball range of 0:16:42.640 --> 0:16:45.800 the company's valuation. That would be a safer thing to say, 0:16:45.880 --> 0:16:50.160 because you are acknowledging that this cost to duplicate method 0:16:50.680 --> 0:16:53.960 does not take all assets into account because it just 0:16:54.320 --> 0:16:57.920 it's not designed to be able to do that. Next up, 0:16:58.480 --> 0:17:03.640 we've got the discounted cash flow method, or DCF method, 0:17:04.080 --> 0:17:06.199 and in some ways it's kind of the opposite of 0:17:06.240 --> 0:17:10.080 the cost to duplicate approach, because it's all about looking 0:17:10.119 --> 0:17:12.919 forward as opposed to getting a snapshot of current value. 0:17:13.640 --> 0:17:17.159 The DCF method requires analysts to predict how much cash 0:17:17.200 --> 0:17:20.400 flow a startup will have in the future, and then 0:17:20.600 --> 0:17:24.840 also bring into account the expected return on investment that 0:17:24.880 --> 0:17:27.520 the startup is going to create, and putting those together 0:17:27.640 --> 0:17:30.160 tells you how much that cash flow itself is worth, 0:17:30.520 --> 0:17:33.440 and that ends up allowing you to place a valuation 0:17:33.600 --> 0:17:36.720 on the company. To me this method comes across a 0:17:36.760 --> 0:17:39.800 lot like telling fortunes. You're making the best guess you 0:17:39.880 --> 0:17:43.600 can based upon the information that's currently available, but knowing 0:17:43.600 --> 0:17:46.560 how things can change quickly means that at some level 0:17:46.600 --> 0:17:49.320 you really have to acknowledge that this approach is far 0:17:49.359 --> 0:17:53.600 from bulletproof. The last method can sometimes feel the most 0:17:53.720 --> 0:17:58.080 arbitrary of them all. It's called the valuation by stage method, 0:17:58.480 --> 0:18:02.600 So this method assigns value based upon how far along 0:18:02.680 --> 0:18:06.880 the startup is as it develops to become a real boy. Wait, 0:18:07.080 --> 0:18:10.240 I'm sorry, No, I'm sorry, that's pinocchio. I mean when 0:18:10.240 --> 0:18:13.679 the startup is becoming, you know, its own standalone, real 0:18:13.720 --> 0:18:19.040 company that can exist without regular injections of investment cash. Obviously, 0:18:19.560 --> 0:18:23.000 the earlier the startup is on the journey, the lower 0:18:23.040 --> 0:18:25.840 its valuation is going to be. And only if the 0:18:25.880 --> 0:18:28.680 startup is able to hold together and continue to develop 0:18:29.320 --> 0:18:32.920 and reach certain milestones like finding the right leadership team 0:18:32.960 --> 0:18:37.560 that's a milestone, or forming strong allegiances in partnerships with 0:18:37.680 --> 0:18:42.720 other companies that's another milestone. Hitting these milestones tells the 0:18:42.760 --> 0:18:45.359 investor community, Oh, you have reached the next kind of 0:18:45.480 --> 0:18:49.560 level in your growth, and thus your valuation has increased 0:18:49.680 --> 0:18:52.800 because you are more stable and you're on a better 0:18:52.920 --> 0:18:58.320 footing for reaching profitability or eventually going public. As we said, 0:18:58.480 --> 0:19:02.320 profitability kind of doesn't matter, it's kind of crazy, but 0:19:02.480 --> 0:19:05.080 profitability in the view of investors, as in they're getting 0:19:05.080 --> 0:19:08.280 a return on their investment. So that can also include 0:19:08.280 --> 0:19:10.159 things like if you're able to show that you have 0:19:10.200 --> 0:19:15.280 a really strong path toward generating revenue and scaling up 0:19:15.359 --> 0:19:21.679 the business, that is incredibly valuable, enormously valuable, and a 0:19:21.680 --> 0:19:25.240 lot of startups fail to ever reach that because scaling 0:19:25.520 --> 0:19:28.399 is hard. Now, the goal of the investor is pretty simple, 0:19:28.480 --> 0:19:32.760 to get a return on their investment, preferably a nice, big, 0:19:32.880 --> 0:19:38.480 fat return. The goal of the startup that depends. There 0:19:38.520 --> 0:19:43.720 are a few potential outcomes for startups, and depending upon 0:19:43.760 --> 0:19:46.720 what the founders want, some of them may be desirable 0:19:46.720 --> 0:19:48.840 and some of them may not be. All of them, 0:19:49.440 --> 0:19:54.040 assuming everything turns out well, means that they will be very, 0:19:54.720 --> 0:19:59.440 very wealthy. We're going to talk about those potential outcomes 0:19:59.560 --> 0:20:12.480 after we take another quick break. All right. Before the break, 0:20:12.520 --> 0:20:15.960 I mentioned that there are a few different potential outcomes 0:20:16.000 --> 0:20:19.159 that are hoped for among startups in general and unicorns 0:20:19.160 --> 0:20:25.040 in particular, and they're pretty easy to understand. One, as 0:20:25.119 --> 0:20:29.400 I've mentioned before, is for the company to ultimately go public, 0:20:29.680 --> 0:20:35.440 to become a publicly traded company. Usually this is managed 0:20:35.480 --> 0:20:40.080 by having an initial public offering or IPO. There's a 0:20:40.240 --> 0:20:44.080 whole process involved in that, and obviously it's not just 0:20:44.200 --> 0:20:47.080 for the tech sector. It's for any company that's going public. 0:20:47.840 --> 0:20:52.320 But the goal here is to offer shares of the company, 0:20:52.640 --> 0:20:56.520 shares of ownership up for sale on the stock market, 0:20:57.080 --> 0:21:00.240 and this will end up creating a big in jecttion 0:21:00.359 --> 0:21:04.680 of capital which the business can then use toward, you know, 0:21:04.840 --> 0:21:10.159 increasing the size of the business, expanding business in various ways, 0:21:10.480 --> 0:21:14.879 business e business stuff. So it's all about growth really. 0:21:15.160 --> 0:21:20.000 It does, however, mean also that the leadership and the 0:21:20.040 --> 0:21:25.400 investors are seeding some control of this business to the shareholders. 0:21:25.680 --> 0:21:27.840 Like when you own a share in a company, you 0:21:27.920 --> 0:21:32.200 also technically have a say in how that company is run. Now, obviously, 0:21:32.560 --> 0:21:35.959 if you only have a share and there are millions 0:21:36.000 --> 0:21:39.800 of shares out there, your voice is a tiny one 0:21:39.920 --> 0:21:43.040 and it's only through big collections that you can really 0:21:43.440 --> 0:21:48.080 make any kind of movement. But there are groups that 0:21:48.160 --> 0:21:51.080 form together to do just that. And they're also like 0:21:51.320 --> 0:21:55.159 activist investors who will invest very heavily in a company 0:21:55.200 --> 0:21:59.639 so that they have you know, a significant ownership, maybe 0:21:59.680 --> 0:22:02.760 not you know, enough to rank a whole percent even, 0:22:02.800 --> 0:22:05.919 but significant enough for them to be a voice that 0:22:06.119 --> 0:22:10.119 is impossible to ignore. And that means that you know, 0:22:10.160 --> 0:22:13.119 you're not making all of your own decisions. Some of 0:22:13.160 --> 0:22:17.399 those decisions are subject to the whim of the shareholders. 0:22:18.080 --> 0:22:20.000 It gets a little more complicated than that, but you 0:22:20.040 --> 0:22:23.320 get the basic idea, But there's no rule that says 0:22:23.359 --> 0:22:27.840 a startup, even a unicorn, has to go public. It doesn't, 0:22:28.280 --> 0:22:32.240 It could remain a private company. The issue with that, however, 0:22:32.480 --> 0:22:37.200 is that private companies don't have a way to generate 0:22:37.280 --> 0:22:41.639 this enormous influx of capital the way a publicly traded 0:22:41.640 --> 0:22:46.760 company does with an IPO, So it is very difficult 0:22:47.080 --> 0:22:50.520 to get the capital together to do things like expand 0:22:50.520 --> 0:22:54.280 the business and to scale up, and it might mean 0:22:54.359 --> 0:22:58.080 having to get more investments, which you know that can 0:22:58.640 --> 0:23:04.480 end up being a law term challenge, or relying upon 0:23:04.560 --> 0:23:08.720 the company's own profitability where you're pouring the profits back 0:23:08.760 --> 0:23:11.919 into the company itself, or to grow the business. But 0:23:12.119 --> 0:23:15.440 that can be much much much slower than holding an IPO. 0:23:15.960 --> 0:23:20.720 Even in publicly traded companies, growth isn't always enough. It's 0:23:20.720 --> 0:23:24.040 not enough for a company to grow from quarter to quarter. 0:23:24.720 --> 0:23:28.360 The rate of growth becomes important. Shareholders want to see 0:23:28.359 --> 0:23:33.280 a company grow faster this quarter than it grew last quarter, 0:23:33.840 --> 0:23:38.400 So the rate of growth is important, not just that 0:23:38.440 --> 0:23:41.640 the company grew, but how fast did it grow. It's 0:23:41.680 --> 0:23:45.080 wild to me that it could be a case where 0:23:45.160 --> 0:23:47.600 you might say, oh, this company didn't grow as much 0:23:47.600 --> 0:23:50.840 as we hoped it would, and therefore we've lost confidence 0:23:50.840 --> 0:23:53.440 in it. It's crazy to me that that's a thing, 0:23:53.560 --> 0:23:57.360 because the company still grew, it just maybe didn't grow 0:23:57.400 --> 0:23:59.879 as fast as you liked. So like sometimes you'll see 0:24:00.160 --> 0:24:06.000 headlines about a company reporting a decline in growth but 0:24:06.160 --> 0:24:08.639 still growing. It's just not growing as quickly as it 0:24:08.760 --> 0:24:11.440 was previously, and yet that can be seen as this 0:24:11.920 --> 0:24:16.480 terrible sign. And I think personally this focus on growth 0:24:16.920 --> 0:24:21.439 has been incredibly unhealthy for companies in general and for 0:24:21.560 --> 0:24:24.280 society as a whole. I just don't think it's the 0:24:25.160 --> 0:24:29.959 right philosophy. It's very difficult to sustain, and it drives 0:24:30.000 --> 0:24:34.720 a lot of bad decisions. I would say, but that's 0:24:35.080 --> 0:24:39.600 again I'm getting off topic. I apologize so anyway that 0:24:39.720 --> 0:24:43.920 even with public companies or private companies, growth is always 0:24:44.440 --> 0:24:47.119 a concern, and it's harder to do when you're a 0:24:47.160 --> 0:24:50.800 private company. Sometimes there is a third option. You don't 0:24:50.840 --> 0:24:53.080 have to go public, and you don't have to stay private. 0:24:53.440 --> 0:24:56.600 The third option is he finds yourself a sugar daddy. 0:24:57.359 --> 0:25:00.280 By that, I mean you find a bigger company that 0:25:00.320 --> 0:25:04.320 wants to acquire your startup. This is kind of it 0:25:04.359 --> 0:25:07.400 almost became a joke that people were going out and 0:25:07.440 --> 0:25:11.679 founding startups just in the hopes that a bigger company 0:25:11.680 --> 0:25:14.120 would come along and spend a ridiculous amount of money 0:25:14.200 --> 0:25:17.320 to acquire the startup. And you don't have to worry 0:25:17.359 --> 0:25:20.120 about whether or not your business is profitable, like that 0:25:20.160 --> 0:25:22.479 never even becomes a concern. All you have to do 0:25:22.560 --> 0:25:27.040 is create an organization that seems desirable for some reason 0:25:27.600 --> 0:25:30.080 and then sign on the deadline and accept the big 0:25:30.080 --> 0:25:33.560 old checks. And you didn't have to do something as 0:25:33.600 --> 0:25:38.160 complicated as running a business and making it successful. There's 0:25:38.200 --> 0:25:40.119 a bit of there's a bit of truth to that, 0:25:40.320 --> 0:25:43.959 but that's obviously an oversimplification and almost a parody of 0:25:44.000 --> 0:25:47.840 what's actually happening. So what is going on here, Well, 0:25:47.880 --> 0:25:51.480 maybe the bigger company is looking at the startup as 0:25:51.640 --> 0:25:54.879 a potential rival further in the future, and so the 0:25:54.880 --> 0:25:58.480